Waste Industries Q4 2007 Earnings Call Transcript

Mar. 5.08 | About: Winner Medical (WWIN)

Waste Industries USA, Inc. (NASDAQ:WWIN)

Q4 2007 Earnings Call

March 5, 2008 2:00 pm ET

Executives

Jim W. Perry - President, Chief Executive Officer & Director

D. Stephen Grissom - Chief Financial Officer & Vice President, Finance

Harry M. Habets - Chief Operating Officer & Vice President

Lonnie C. Poole, III - Vice President, Corporate Development

Michael J. Durham - Vice President, Administration & Support Services

Analysts

Scott Levine – JP Morgan

Brian Butler – Friedman, Billings & Ramsey

Operator

Good day and welcome to today’s Waste Industries fourth quarter 2007 earnings results conference call. Today’s call is being recorded. For opening remarks and introductions I’d like to turn the call over to the President and Chief Executive Officer, Mr. Jim Perry. Please go ahead, sir.

Jim W. Perry

Good afternoon everyone. Thank you for joining us today to talk about a great year 2007 and our fourth quarter performance. In just a minute you’ll hear from Steve Grissom, our Chief Financial Officer followed by Harry Habets, our Chief Operating Officer. Also in the room today with us is Len Poole, our VP of Corporate Development and Mike Durham, VP of Administration and Support Services. Before I go any further, though, I’ve been instructed to read for you a statement about our proposed to take private transaction.

As Waste Industries has reported the company has entered into a merger agreement with a group of investors of which I am one to take the company private by [inaudible 00:01:17] outstanding shares of Waste Industries stock. A special committee of the Board of Directors reviewed the merger agreement with the assistance of its financial advisors, JP Morgan Securities, and its independent legal counsel. The merger agreement is included as an exhibit to Waste’s Form 8-K filed with the SEC on December the 20th, 2007. The company also has filed with the SEC preliminary proxy materials for the special meeting of the shareholders at which the merger agreement will be voted upon and you are directed to those preliminary materials for information regarding the proposed transaction. Revised preliminary proxy materials were filed with the SEC on March 3rd. Waste Industries will issue further announcements regarding the proposed transaction and make additional filings with the SEC when and as appropriate.

Neither I nor any other Waste Industries employee on this call will address the proposed transaction or respond to questions on the proposed transaction.

So with that, let me turn it over to Carol [inaudible 00:02:20] and she also will read our customary Safe Harbor statement.

Carol

Forward-looking statements made herein are made only as of the date of this conference call and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statement is contained in the company’s SEC filings. Such filings include, but are not limited to, the company’s 10-K for the year ended December 31, 2006. Copies of these filings are available on our website at www.WasteIndustries.com or may be obtained by contacting the company or the SEC.

Jim W. Perry

We were pleased with our overall performance for the quarter and for the year. For the quarter total revenues increased 4.4% to $84.7 million compared to $81.1 million for the same quarter in 2006. After adjusting for the impact of costs related to the proposed going private transaction income from continuing operations was $6.3 million and we earned $0.44 per share from continuing operations compared to $0.37 per share for fourth quarter 2006. We ended the year with cap ex of $36.9 million and we were very pleased with free cash flow through 12-31 of $34.4 million compared to $6.1 million at year end 06. As we all know 2007 ended with some significant headwinds related to slow down in the housing business. As you would expect the earliest indicators of a soft economy for our company, or any waste company, is in the industrial hauling segment and seeing these volumes at our landfills. For the quarter on a same store basis total hauls were down 6.5%. However roll off revenues were down only 3.3% pointing to better pricing for available work. At our three largest C&D landfills volume for the quarter was down about 15% compared to a year ago. However over the same period [inaudible 00:04:37] at our three MSW sites increased about 8%. Overall landfill volumes were down about 2.2% for the quarter while landfill pricing improved about 4.6% primarily as a result of a volume mix leaning more toward the MSW sites. While roll off and landfill volumes were off for the quarter several of our other business segments realized internal volume growth led by commercial and plumbing work at 5.8% and residential collection service at 2%. Overall internal growth for the quarter was about 1.5%.

On a more positive note we completed construction of the new Wake County landfill during the fourth quarter and accepted the first local waste on February the 7th. Volume into the new South Wake landfill is currently averaging about 600 to 700 tons per day but we expect tonnage to ramp up as the county starts to close out their North Wake facility. It was also the core point to several important features about our company. First of all we have a broad business base spread over the Southeast region footprint and our operations serving a wide variety of industrial, commercial and residential, municipal customers. Secondly because of our extensive network of hauling, transfer and disposal operations we are better able to capitalize on available growth opportunities within each of the markets we serve even in a slow economy. A good example is in the roll off area. While demand was down for the quarter when compared to a year earlier at about 20 locations there were 11 operations which actually experienced an increase in hauling activity.

In the area of M&A we acquired two companies with about $2 million in annual revenues bringing the total for the year to nine acquired companies with about $312 million in annual revenues. Taking a little longer look back we’ve acquired about 30 operations over the past three years and the key point is that all this acquisitions have been tuck ins which in many cases helped us internalize more of our waste frame and improve our route put activity. Internationalization rate for the fourth quarter ends up being 28% versus 24.1% a year ago and on disposal costs versus collection of revenue dropped to 16.1% which is an all time low. Let me explain this metric a little further. We started to track this back before we reentered the landfill business in 1998. 10 years ago disposal costs was 32% of collection revenues and that number has treaded down to the 16.1% I mentioned a moment ago. Obviously, internalization of waste has been a major part of our growth strategy and we will continue to look at both hauling and disposal opportunities in the future.

Another bright spot for our company and the industry has been stabled commodity prices especially on corrugated cardboard. I believe 2007 on average was one of our better years for all products recovered and solid with OCC reaching well above $120 per ton. This is another example of our incremental revenues from a lone business segment can have a significant impact on our overall performance especially when all other parts of our business may be experiencing some weakness. Erratic and high fuel costs continues to be a challenge. We’ve discovered when fuel prices increase rapidly oil energy adjusts but the process is not as efficient. Such was the case during the fourth quarter when we experienced fuel costs increases of over $0.50 per gallon. When we look back at fourth quarter 2006 the average costs per gallon was $2.40 compared to $3.14 per gallon in the fourth quarter of 07. The bottom line is that we’re while our oil and energy recovery process has been effective at recovering high energy costs, we have to remember when fuel prices escalate rapidly we can expect a lag in recovery of these additional costs and we believe that the continued wide swings in fuel costs both up and down which make oil energy component of our service pricing and an important ongoing practice.

Before I turn it over to Steve let me highlight a number of other key areas for 2007 that I think are very noteworthy. First of all, over the year excluding the costs of the proposed going private transaction, our operating margin improved from 12.2% to 14.5%. Our pre-tax income increased 26.5% and we earned $1.74 per share compared to $1.21 per share in 2006. Secondly, we continued to improve our productivity by making strategic acquisitions and by streamlining our operations. For example, we reduced our collection fleet size 10 units between the third and the fourth quarter and over 50 units for the year 2007. Harry and his team has done a great job at optimizing our assets. Third, collecting the waste is obviously a priority but collecting the money is equally important and in this area our people did a great job and achieved a DSO of 28 days compared to 34 days at year end 06. Fourth, we’re a safer company, something that we can be proud of. We recorded fewer truck accidents in 2007 than for 2006. Fifth we made it easier for our customers to do business with us and currently 11,000 customers now pay their bills electronically. Finally, we were honored to have Forbes Magazine recognize Waste Industries as one of the 200 best small companies in America.

All in all by any measure 2007 was a great year for our company and because of our strong operating fundamentals I believe we are well positioned to deal with the challenges that the overall economy is now facing. With that I’ll turn it over to Steve for further insights into our financial results.

D. Stephen Grissom

Let’s first review the year-over-year results for the fourth quarter beginning with revenue. Service revenues for the quarter increased 4.5% to $84.4 million. Internal growth was 1.5% primarily attributable to an increase in the fuel energy surcharges of 1.7% offset by declines in volume and pricing of 10 basis points each. Acquisition growth was 3.2% and recycle commodities revenue declined 20 basis points for total service revenue growth of 4.5%. Our commercial and residential product lines experienced strong organic volume growth but were more than offset by weaker roll off volume. Even with the slower roll off volume environment, overall volume is close to breakeven after experiencing almost two years of quarterly decline.

In our third quarter call we had predicted that volume growth would turn positive in Q4 but at that time we didn’t expect the extent of the impact on the roll off business. Also as predicted the rate of pricing growth declined from the prior period levels. Our more aggressive pricing initiatives began in 2005 and by the later part of 2006 we had culled most of our lower price and lower margin contracts. In the year-over-year pricing comps are now much tighter.

Now, for a little more detail on the operating margin development. The operating margin of 11.9% is 290 basis points lower than the fourth quarter last year. Two primary items contributed to this decline in operating margin after six consecutive quarters in year-over-year operating margin expansion. First, the $1.7 million of charges incurred in the quarter relating to the proposed going private transaction which represented 200 basis points of decline. Second, fuel costs were 160 basis points higher than the prior year quarter. The higher fuel surcharges were simply not adequate enough to offset the rapid increase in fuel cost in the fourth quarter and therefore reduced earnings by a $0.01 per share versus the prior year. As a percentage of revenue, operations costs was unfavorable 180 basis points, SG&A costs was unfavorable 190 basis points, our gains from sales of equipment and assets impairment were 50 basis points favorable and depreciation and amortization was favorable 30 basis points for the quarter.

Moving on to operations costs. The 180 basis points increase versus the prior year quarter was impacted by the following items: first, we experienced unfavorable fuel costs of 160 basis points; and second higher cash [inaudible] insurance and workers’ compensation costs of 100 basis points. The average fuel cost per gallon was 31% higher year-over-year for the quarter. Now, the disposal costs continues to trend favorably and was 80 basis points lower than prior year quarter reflecting again our increasing waste internalization which was 28% versus 24% in Q4 of 06. Sequentially, total operating costs were 20 basis points lower than Q3 levels.

SG&A costs for the quarter were $2 million higher year-over-year and as a percentage of revenue increased 190 basis points but, once again, $1.7 million of this increase is associated with the costs of proposed going private transaction. The remaining $.3 million variance is due to higher payroll expense and medical plans. For the full year 2007 excluding the going private transaction costs the operating income margin would have been 14.5%, this is an improvement of 200 basis points over 2006 and a 500 basis point improvement over 2005. Margin improvements continue to reflect our ongoing pricing initiatives, the increasing route densities resulting from a tuck in of acquisitions and organic growth, higher waste internalization and leveraging of our SG&A structure. One of the measures of cash flow for the company which is operating income before depreciation, amortization and accretion increased 9% to $79.9 million for the full year or 23.4% of revenue compared to 22.4% of revenue the prior year.

Now let’s discuss free cash flow for a moment. The total year free cash flow is a recorded $30.4 million compared to $6.1 million for the prior year. This is based on cash provided from operating activities of $64.3 million, less purchases of property and equipment and landfill construction of $36.8 million, plus proceeds from sale of equipment of $2.9 million. Contributing to this improved cash flow is an excellent days sales outstanding of 28 days at year end compared to a respectful 34 days at prior year end. I want to congratulate our collections group and [inaudible] organization for their extraordinary efforts. Total bank debt of $165 million outstanding at the end of Q4, about $8 million higher than yearend 06 and the debt to total capitalization ratio is 50% compared to 52% the prior year. And, as Jim stated earlier, we are very well positioned for the future with a solid balance sheet, improving margins, we have a seasoned and motivated work force that provides great customer service and we look forward to another year of record breaking performance.

Now, I’ll turn it over to Harry for a discussion on the operations.

Harry M. Habets

First, I’d like to address two questions in everyone’s mind. How has the credit crisis impacted our business in Q4? And second, are we seeing any improvements in the C&D business in our markets. In looking at the growth analysis report, like all the other players our landfill pricing would appear to be up 4.6% in Q4. But, when you look behind the numbers it’s evident that is not a price increase that’s driving up unit prices but a change in volume mix. Sequentially our C&D volume was down 21% while our MSW volume did not change and we all know that MSW revenue per ton is greater than C&D revenue per ton resulting in the average revenue per ton being up 4.6%. I only mention that, that pricing opportunities are still very limited in the landfill business.

Both the C&D landfill volume and C&D roll off haul volumes declined every month in the quarter and it appears that both hit bottom in January based on February’s data. C&D tonnage at our Atlanta C&D landfill was up 10% in February from January in spite of fierce price competition from the neighboring waste management site. Volumes elsewhere held steady month-to-month. The temporary C&D roll off activity so far in Q1 is up 5% in December but still down 8% from November’s level. A good leading indicator of where the roll off business is headed is that we did deliver more roll off containers than we returned to the stock in the month of February. Of course, we operate in the southeast which is still one of the fastest growing parts of the country and enjoying a very mild winter.

When looking at our revenues there are a number of bright spots and I just want to highlight three of them. Sequentially, quarter-over-quarter and year-over-year we are enjoying strong organic volume growth in our commercial product line which is the industry’s most profitable product line. We are adding more than a route of new commercial work every month and simply laying it on top of our existing routes. Thanks to our targeted sales efforts and routing tools we are actually running fewer commercial trucks today than we were a year ago. Another example is our residential product line. Year-over-year, residential revenue is up 8% while we are running 2% fewer routes. Based on the number of site specific plans we expect to see good margin improvement in this product line in 2008. 2007 was our best year ever for special waste revenue. It’s hard to believe coming off such a strong 2006 and for a third year in a row 2008 special waste revenues seem to be on a similar track partially caused by the generators rush to avoid the $2 a ton North Carolina waste tax which is effective July 1 08.

Some of you will recall the bird song, turn, turn, turn and it goes something like this, and I won’t sing it, everything turn, turn, turn, there is a season. Now, back in 2003 when it was not in vogue we sensed that the pricing environment was getting ready to change. We acted on our hunch and we started to select point of service price increases. Now, every year since them we’ve put all of our accounts through our profitability filters and we secured well deserved price increases, particularly in 2005 and 2006 as Steve pointed out. Now today, we’re all reading the same articles about how going into the New Year the restaurants and retail stores are coming off one of the most challenging years ever. For example, 49% of the restaurants surveyed by the National Restaurant Association reported same store sales fell in January and 54% said customer traffic feel in January for the fifth month in a row. Now, when our customer’s revenue goes down, they focus on cost and we started seeing signs of this in Q3. Now, I want to point on that this should not be construed to mean that we have abandoned price increases as part of our tactic to improve margins, it’s just to kind of give you a flavor of what we’re seeing.

Now, let’s take a look at our cost of doing business. During Q4 we moved as quickly as possible to right size each branches roll off operations to mirror the reduction in demand for C&D service. We moved the surplus equipment to a central location to be redeployed as demand increases. Today, each one of our branches has just enough roll off trucks to meet their market’s current demand for roll off service. The result is maximum return on investment from the assets on hand. I also want to highlight some of the initiatives that had a positive impact on our Q4 internalization rate. First, we opened up a satellite collection operation at our Red Rock C&D landfill on October, 2007 and we’re now internalizing more of our C&D tonnage collected in the Raleigh market. Our Atlanta west operation internalized 96% of their waste versus 93% in Q4 2006. And as a result of a major commercial re-route our tri-east North Carolina branch started internalizing an additional 500 tons per month in November.

Our pricing initiatives are targeted to achieve above inflation unit revenue growth but, we’re not relying on price increases alone to improve our margins. We will secure properly priced new work and be protective of our existing profitable work in order to maintain and improve our route density and we will have ongoing customer [inaudible] profitability analyst on an annual basis to identify potential price increase opportunities. We also have a number of initiatives underway to further reduce our transaction costs, our customer acquisition costs and our repair and maintenance costs and we will continue to use our routing tolls to improve our routing efficiency. Of course, we owe all of our success to the dedication and hard work of all of the people at Waste Industries.

Jim W. Perry

A very good report and a lot of information. With that, we’ll open it up for Q&A to see what question you might have about our performance for the quarter or for the year.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Scott Levine with JP Morgan.

Scott Levine – JP Morgan

You mentioned I believe in 11 of 31 operations or markets you saw hauling increase during the quarter. I’m hoping you might be able to comment a little bit about which market within your footprint were weaker or strong on a relative basis.

Jim W. Perry

Well, I can’t remember all of them Scott but I do have branch count and the ones that stand out is on the coast, [inaudible] markets were softer than others. Myrtle Beach, appeared to be down. Branch-by-branch those are the only ones I can think of right off the bat.

Harry M. Habets

The Tidewater area was very soft and the west side of Atlanta was soft.

Scott Levine – JP Morgan

Then Harry, in your comments you mentioned restaurants and kind of just thinking about commercial collection were you guys surprised at any change in behavior on the part of customers? Has there been any changes in terms of pricing trends on the part of either your larger or your smaller competitors? And, what should we think their kind of entering 2008?

Harry M. Habets

We haven’t seen a change in the large players. I mean, everyone is still looking to improve their margins. We really haven’t seen them chasing volume at the expense of price and even the little guys, their costs are going up as well. All I’m saying is the opportunity to get price increases above and beyond your costs increase I think are going to be more difficult to obtain going forward than they have been maybe in the last couple of years.

Scott Levine – JP Morgan

One follow up then, given the positive change and the strength in pricing across the board the last few years here, what do you guys view as the biggest threat to this type of environment? Is it a true deep broad based recession? Is there anything else you kind of think about?

Harry M. Habets

Right now while everyone’s thinking about it I can tell you this, so far it has not bled over to the commercial side. So, we have not seen a lot of customers calling and saying, “Hey reduce my service.” In fact, along our coastal areas we’re already starting to see the ramp up for the season. So, we’re hopeful we don’t see that and so far there don’t appear to be any signs. Residential shouldn’t be affected at all and as I said I think our roll off work seems to have bottomed out.

Jim W. Perry

On the permanent work roll offs, permanent roll offs, that also softened a little bit. [Inaudible] work kind of tied to the production in the plant slowed but, we think it’s pretty stable at this point in time.

Operator

(Operator Instructions) We’ll go next to Brian Butler with Freidman, Billings, Ramsey.

Brian Butler – Friedman, Billings & Ramsey

I just wanted to follow up on price again and just see if maybe I’m missing something. So, pricing growth was negative 10 basis points, -1%. I guess, can you break that down a little bit and where you’re seeing that? Is that all at the landfill? All on the collection side?

D. Stephen Grissom

Well, our collection side, as we mentioned the residential and commercial lines were quite good on internal growth. The roll off follow off, the follow off of that business really impacted the overall growth. As we said before, on the landfill side the C&D was soft but the MSW was up. So, we had predicted, you know, go back to the third quarter call, we felt that the negatives that we were seeing in volumes of 2 to 3% for the last few quarters would turn positive because we’ve anniversaried on some contract losses in Q3 of 06 but, we didn’t quite turn positive but we were almost breakeven. You know, you mentioned 10 basis points, we were almost at breakeven instead of turning positive. But, we expect the next quarter – it depends on how more extensive the losses or the roll off volumes, how much softer they get, if they get softer.

Harry M. Habets

On the pricing we made a conscious effort in Q3 – we push pricing every quarter, it’s an ongoing program it’s not like we decide that we’re going to raise rates in one specific month, we have an ongoing price increase program. Every month we’re going into our customer base and looking for price increases. But, what we noticed in Q3 was more of a push back than we have seen in the last couple of years and so we held back a little bit. This after all, the commercial side is our most profitable product line and so we thought it was prudent to maintain route density so we just decided to be a little less aggressive in Q3 and Q4. But, as our costs ramp up, and they are going up, costs of steel, driver wages, we’re going to pass those costs on to our customers and everyone else seems to be doing it to. I just don’t know if all the other players are seeing that or not, maybe we’re a little smaller and a little closer to it but, we can sense it.

Jim W. Perry

I just want to add to the comment about the roll off. I will say I was looking at the difference between the permanent and temporary for fourth quarter and we talked about the work being down and the price being up, the permanent work actually enjoyed a bit of price environment than the temporaries. You would expect as the temporary work falls off there may be a push to soften up on the price. The overall impact though was that on a per year basis even with less work, the pricing did go up.

Brian Butler – Friedman, Billings & Ramsey

Would it be fair to characterize the strong organic growth you saw in the commercial business as being driven by lower pricing?

Harry M. Habets

No, oh, no. That is strictly a sales and marketing effort and we’re not giving it away. We’ve got a very good sales program out there and it’s not at the expense of marketing.

Jim W. Perry

And, the 30 acquisitions that I mentioned, highlighted, onward tuck ins, as you strengthen those routes as you will, the impact is that the selling price based on the density and the productivity gains you have, you just have a better opportunity at the [inaudible] without sacrificing the margins. So, we’ve add more work on existing routes and that’s taken some of the pressure off the pricing.

Harry M. Habets

What I think really differentiates our company is we made a decision in Q3 06 to realign our sales force and our local branch managers, they manage the sales effort. Sales people report to that local branch manager and he is in the perfect position to seize the moment. I don’t believe that’s how the other players manage their sales effort. So we’ve got feet on the ground and we’ve got the local manager directing that effort.

Jim W. Perry

The keyword is local and I’ve tried to – I probably didn’t make a good enough point about that but being in a southeast region and having a network of hauling companies, and they certainly have a variety of markets both secondary markets and bigger urban markets, it is critical that the branch manager, the guy who’s closest to the work has the authority to promote his services and price them according to the metrics and the costs that it takes to deliver those services in his market. So, Harry is spot on, we delegate that to the branch manager and he directs the sales activity and he moves where he needs the additional revenue on which route has capacity and that’s an effective way to grow your business.

Operator

(Operator Instructions) Mr. Perry there appears to be no further questions. I’ll turn the call back over to you for any closing remarks.

Jim W. Perry

Thank you very much and thank you everyone for joining us today. 2007 was another special year. It marked the 34th consecutive year of profitability and before I sign off I’d like to acknowledge some people that made that possible. First of all there are a lot of loyal customers, many of which have honored us with their business now going on decades. I think we’ve still got some of the first accounts that we sold in the 70s. I’d like to thank our dedicated employees who Harry mentioned always find a better way to provide great service and all done under some pretty tough circumstances. I’d like to acknowledge our vendors, suppliers, bankers who often get overlooked but who in many cases become our business partner as we try to adapt to the business climate around us and expand our franchise. And last, but certainly not least, to our shareholders who have entrusted us with their investments and hopefully they have been pleased with the results. Again, I thank all of you for joining us today and I look forward to talking to you at some point in the future. Good day.

Operator

This does conclude today’s conference call. We appreciate your participation. You may disconnect at this time.

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